One of the “BRICS”, Brazil is the largest economy in Latin America and one of today’s fastest growing economies. The following article will try to contribute to the understanding of Brazil’s sustained growth and also what are the challenges the economy will face in the following years.
The Brazilian economy is ranked 7th by GDP by the World Bank and IMF and 11th in PPP[1] terms (The World Bank Reports, 2011). Some of the economic growth drivers are: growing middle class, increasing wages, low unemployment rates (6.5%), and relatively low national debt; however, there are also challenges such as: high inflation rate, raising international uncertainty and social deep inequalities. In Brazil, the recession lasted only two quarters after September 2008. The GDP growth returned to its positive in 2010 and by 2012 it is already expected to reach the initial figures before the crisis.
One of the reasons that made the rapid recovery possible is the Brazilian economy’s relative independence from the global economy, compared to other Latin American and Caribbean countries, which are strongly dependent on the United States’ economy. With a strong domestic market and national-owned local industries, as well as natural resources, Brazil is less vulnerable to external variations and crises (Baer, 2008). The government is aware of this window of opportunity and is making efforts in harvesting them, by improving its worldwide image and sustaining domestic market growth. It is planned to be accomplished by organizing two of the world major sports competitions: The World Cup in 2014 and the Olympic Games in 2016, which will require massive investments in areas such as urban and social development, as well as infrastructure.
The favorable situation of present Brazil was achieved through decades of social and economic transformation. It can be said that the pillars of growth were built before the Second World War (1930-1945), when Brazil went through a period of fundamental institutional change and innovation, reflected in the legal, administrative, and production structures. In the beginning of 1950, the process of industrialization was accelerated, and it was focused on infrastructure, energy and transportation sectors; yet inflation and public deficit soon became a problem. To reduce the deficit, great efforts were made to attract foreign investments, sustain the industrial development and increase imports.
Moreover, in the early 1980, heavy international borrowing generated a debt crisis, high external vulnerability and domestic inflation. In 1985, the country returned to a civilian government and major political and institutional reforms brought down the inflation rate and minimized the state’s intervention in the economy (J. A. de Souza, L. Burlamaqui, N. Barbosa-Filho, 2005). Brazil’s present economic growth started in 1994 and since then, the economy has largely been based on three sectors: agriculture, manufacturing and service. Foreign investors are attracted by its natural resources, strong potential for industrial development and large consumer markets. However, there are still heavy barriers and regulations for foreign businesses such as inadequate infrastructure and poor business climate, which are slowing the overall foreign business growth process (Johnson, 2011).
Historically, Brazil’s society was predominantly rural and focused mainly on agriculture; today more than 87% of the population is living in urban areas and an important result of Brazil’s rapid urbanization are the favelas. Authorities are making efforts to increase safety by reducing illegal activities and high crime rates. In recent years, Brazil made incredible progress in reducing the poverty level from 21.7% in 2003 to 9.9% in 2009, but social inequalities and regional differences still remain important social issues, with the North and Northeast regions being poorer compared to South and Southeast regions. High social inequity is very common for Latin America, and Brazil makes no exception with a Gini Coefficient of 55 compared to other developing economies such as India 38, China 41, and Russia 43, not to mention Norway 25. The human development index reflects an improved situation: in comparison with other emerging economies, Brazil ranks 59, ahead of China 75, India 100, but far away from the developed economies. The country already showed a favorable growth pattern but needs to continue on the same path, as inequality is still much greater in comparison to other middle-income countries (UNDP, 2010).
Global economic uncertainty is increasing as a result of the pressure and risks coming from the double-dip recession in Europe and the U.S slowdown. For the Brazilian economy this might mean shrinking global demand for its export products and high inflation rates. However, Brazil’s strong domestic markets and industry sector makes its economy less sensitive to global fluctuations, as it was shown in 2008/2009. Yet, there is still the question whether Brazil will remain untouched by global changes and if the world economic instability will slow down its progress.
[1]
Power Purchasing Parity
Bibliography:
- “Institutional Change And Economic Transformation In Brazil, 1945-2004 – From Industrial Catching-Up To Financial Fragility”; J. A. de Souza, L. Burlamaqui, N. Barbosa-Filho; 2005.
- “Brazil and Global Development Horizons”; The World Bank Reports; 2011.
- “The Regional Human Development Report for Latin America and the Caribbean 2010”; UNDP; 2010.
- “The Brazilian Economy Growth and Development”; Werner Baer; 2008.
- “The Brazilian economy achieved the highest growth in 25 years”; Dan Johnson; 2011.
About the author: Madalina Bouros has just graduated a MSc in International Business at Aarhus School of Business, Denmark and she has a BSc degree in Economic Management from the Academy of Economic Studies, Bucharest. Currently, she is working in business development in Washington DC. She is passionate about economic development and emerging markets.
